Trump has
said in victory rallies since the election that for trade,
"we have to look at it almost as a war," asking "who the hell
cares if there's a trade war?"

Trump said China specifically is committing "the greatest jobs
theft in the history of the world."

Willem Buiter, chief economist at Citi, wrote in a note to
clients before the report of the new tariff that protectionist
trade policies might spark a global trade war, "which could
easily trigger a global recession."

Deutsche Bank has also addressed the negative risks of the Trump
trade agenda. A team from the firm wrote in a note on Friday that
"the biggest threat to growth is a possible protectionist turn,
which could depress global trade and even trigger trade wars."

In addition to the tariff talk,
Trump appointed Peter Navarro head of the new National Trade
Council on Wednesday. Navarro has been a longtime critic of China
— he wrote a book titled "Death By China."

While these moves do not signal a coming collapse in
international trade, they suggest that Trump's more protectionist
tendencies will come out during his time in office.

Additionally, a tariff of any kind is likely to spark a reaction
from major US trading partners such as China. Chinese officials
are
reportedly weighing options for how to respond to hostile
trade moves by Trump.

Given the moves by Trump, we've broken down just how a
protectionist trade scenario could affect the US economy and the
geopolitical order.

A macroeconomic drag

A 5% tariff may affect the US economy — higher costs, a slight
drag to GDP growth — but economists are worried about what it
signals going forward.

Michael Gapen, a chief US economist at Barclays, has estimated
the economic drag that tariffs on imports from China and Mexico
may have on US GDP growth.

Assuming a 15% tariff on Chinese imports and a 7% tariff on
Mexican imports — modestly above their current levels of 2-10%,
depending on the good — Gapen estimated that the US would see a
0.5% reduction in annual GDP growth in just the next year.

Workers
process laptop accessories at a factory in
China.Stringer/Reuters

Meanwhile, Buiter said Citi estimates trade and other policy
uncertainties could be a 1% drag on US GDP over the next year.

And should the president-elect eventually follow through with any
of these policies, the US risks retaliatory measures from other
countries.

"If tariffs are more punitive and lead to a public trade spat
with China, markets will get nervous, especially if a sharp,
retaliatory, [Chinese yuan] depreciation looks like a realistic
response," said Ajay Rajadhyaksha, head of macro research at
Barclays.

If other countries follow this pattern, it could lead to a
downward spiral or litigation at the World Trade Organization.

"Depending on the specific measures, retaliatory action from
elsewhere could be expected, while the risk of trade and currency
wars could grow," said Janet Henry, chief global economist at
HSBC.

Making it more expensive for consumers

An increase in tariffs could be passed through to individual
Americans by companies in the form of higher prices.

Parts for consumer items are made abroad, so increasing tariffs
could make it
more expensive to import these parts for goods. To protect
corporate profits and margins, companies could hike prices —
which is not ideal for consumers.

Aaron P. Bernstein/Getty
Images

A crucial thing to consider here is that this type of price
increase is not caused by the virtuous wage and price increase
cycle, but rather by an exogenous shock to prices without a boost
to the labor market. In plain English, that means that while
parts manufactured in China instantly become more expensive for
Americans under tariffs, wages do not necessarily go up the
corresponding amount to offset this cost increase.

Theoretically, companies could avoid tariffs by increasing
production in the US. However, the problem is that labor is more
expensive in America, so even if companies brought production to
the US, the increased labor costs could push prices up, too.

A 'nail in the coffin' of the post-World War II economic order

Not only could Trump's moves affect everyday consumers in the US,
they also could upend macroeconomic policies that have been in
place for more than half a century. As Buiter notes, these
policies have increased worldwide prosperity and been positive
developments for the US.

From the Citi economist's note (emphasis added):

"We stress the potential multipliers of changes in the US
position on international trade: the US has been the champion of
free trade and open borders for decades. A retreat from
globalization by the US would likely lead to reciprocal actions
from other countries, and reinforce the latest shift towards de-
globalization and could be another nail in the coffin of
the liberal global economic world order that has supported
prosperity since 1948."

Taking it a step further, now that Trump has been elected
president, the possibility of passing the TPP — the landmark free
trade agreement that aims to slash tariffs and promote economic
growth among 12 nations in the Pacific Rim excluding China — has
effectively dropped to nil.

(President Barack Obama's administration has already
suspended its efforts to win congressional approval for the
deal before Trump takes office, saying that its fate is up to the
president-elect and Republican lawmakers.)

However, some voters across developed economies believe free
trade hurts their countries, which is likely a reflection of
their personal experiences.

In the US, 89% of Americans said they think the loss of US jobs
to China is a somewhat or very serious issue, according to Pew
Research statistics
previously cited by Bank of America Merrill Lynch's Ethan
Harris and Lisa Berlin.

Moreover, only 46% of Americans said they think NAFTA was good
for the economy. But it's not just Americans dreaming of a
manufacturing comeback —
Japanese farmers, for example, have been staunchly against
the TPP.

There's some empirical evidence to back up those grievances. In
January, labor economists David Autor, David Dorn, and Gordon
Hanson published a
paper showing that increased trade with China caused some big
problems for US workers.

From the paper's meaty abstract (emphasis ours):

"China's emergence as a great economic power has induced an
epochal shift in patterns of world trade. Simultaneously, it has
challenged much of the received empirical wisdom about how labor
markets adjust to trade shocks. Alongside the heralded consumer
benefits of expanded trade are substantial adjustment costs and
distributional consequences. ...

"Adjustment in local labor markets is remarkably slow,
with wages and labor-force participation rates remaining
depressed and unemployment rates remaining elevated for at least
a full decade after the China trade shock commences.

"Exposed workers experience greater job churning and reduced
lifetime income. At the national level, employment has
fallen in US industries more exposed to import competition, as
expected, but offsetting employment gains in other industries
have yet to materialize."

Moreover, most of the economic gains from globalization have been
for the middle class in emerging markets — not the middle class
in developed markets such as the US.

Below is one of the more popular charts illustrating this, from
the economist Branko Milanovic, via BAML's Ajay Singh Kapur and
Ritesh Samadhiya in June.

BAML

Although both Trump and Hillary Clinton zeroed in during their
campaigns on workers' anxieties over job losses, it's important
to note that at least some of America's job losses are not due to
trade, but rather due to automation. And crucially, automation
not only hits manufacturing, but also affects jobs that require
advanced degrees, such as neuroradiology.

"From a political perspective, I don't think the focus on trade
is misplaced. It's effective because it has an 'other,'"
Alexander Kazan, a strategist at Eurasia Group, said in a
video for the Eurasia Group Foundation. "When you talk about
technology, it's much more amorphous. It's this sense that we all
lose. So I think politically it's less effective."

Depends on how much is done

Ultimately, a lot will depend on how much protectionist policy
Trump is able to pass when he steps into the Oval Office.

Donald
Trump and Speaker of the House Paul Ryan.Thomson Reuters

Some observers say it's unclear how much anti-trade rhetoric
Trump genuinely intends to carry out. Additionally, there is a
strong contingent within Trump's own party that is supportive
of free trade.

The possible tariff and the appointment of Navarro, however, are
signs that protectionist trade could play a major factor in the
Trump policy agenda.